Lumps and Bumps

We are seeing some of those earnings season blowups I had hoped for this week. Unfortunately, I already own a few of them. So, I have to decide to add to my positions or determine if there has been some sort of fundamental change that means I should cut ties and take the losses.

I have been collecting some wildly out-of-favor assets over the past year and these things do not turn around on a dime. We often see a lot of gyrations and missteps before the course is corrected and the stocks move higher.

I usually don't get too bent out of shape by either great or disappointing results but I may have used some very bad words when I saw the report this morning from CPI Aerostructures (CVU). On an operational basis, the quarter was pretty much what I expected. CPI posted second-quarter adjusted EPS of $0.20 on adjusted revenue of $21.0 million, which is in line with estimates and year-ago results. Unfortunately, the company also took a $47 million loss related to revised estimates for a significantly shorter-lived and lower production quantity A-10 wing assembly contract. Congress has cancelled the A-10. The charge caused the company to cut shareholders' equity, which dropped to $61.7 million from $ 88.9 million. Book value looks to have fallen to $7.27 from $10.77. The stock was trading about 11% lower when I wrote so far this morning although it is off the lows.

The company offered strong guidance and CEO Douglas McCrosson was very upbeat. In the press release he said, "Looking past today's non-cash charge related to the change in estimate to the A-10 WRP, we see a business that is as strong as it ever has been. We have a large funded backlog that is on track to reach an all-time high. Our strategy to diversify into commercial aerospace via the business jet sector is paying off now as the demand for business aircraft is showing every sign of recovery."

McCrosson also mentioned possible recoveries of part of the loss from Boeing (BA) or the federal government. That's the key to this stock in the short term and I am hoping we will get some clarification. I am a big fan of this company and am looking for an excuse to add to my position.

Another of this week's disasters includes SkyWest (SKYW). The regional airline reported an ugly quarter that included a loss primarily due to the lower-than-anticipated performance incentive bonuses under flying contracts. Unfavorable flying contract settlements also negatively impacted revenue. The company also had higher training costs and did some kitchen sink type write-downs. Management wrote off certain asset values acquired through the ExpressJet acquisition, the carrying value of the Saltillo paint facility and recorded a loss on the disposition of ground handling fixed assets. SkyWest now expects to report a loss for 2014.

On the positive side, the end is in sight for the unprofitable contract log jam the company has been dealing with, as 56 of its unprofitable 50-seat aircraft contracts will expire in the second half of this year. The aircraft will then be returned to lessors. SkyWest also expects an additional 101 unprofitable 50-seat aircraft contracts will expire and be removed from service by Dec. 31, 2015. Although it will have a full-year loss, the second six-month period should be profitable for the airline. If it is successful, the stock could be worth a few multiples of the current price. I am holding what I own and if the stock goes to $7 I will probably add to my position.

I have always said that the key to earnings season is to be in a position to react to what the market does instead of just predicting what might happen. That's equally true of the positons we currently hold as it is of new opportunities. It is always more fun to read the blowout reports from companies (like the one WPX Energy (WPX) turned in), but there will be bumps in the road. Sometimes I will even just be dead wrong about some of these companies and things will get bad enough that I have to sell at a loss.

As Warren Buffett once said, the returns to value investing can be quite lumpy in the short term. Sometimes those lumps are on the back of the proverbial head, as companies misstep before the anticipated correction.